SA 510 - Initial Audit Engagements - Opening Balances

# SA 510 – Initial Audit Engagements – Opening Balances

## What are "Opening Balances"?

Opening balances are the financial statement amounts and disclosures at the start of the period. They are not limited to balance-sheet figures — they also include items like contingencies and commitments existing at period start.

## Key Definitions

• Initial Audit Engagement – An engagement in which either:
• The FS for the prior period were not audited, OR
• The FS for the prior period were audited by a predecessor auditor (a different audit firm).
• Predecessor Auditor – An auditor from a different audit firm who audited the FS of the entity in the prior period.

## Objective of the Auditor (w.r.t. Opening Balances)

In an initial audit engagement, the auditor must obtain Sufficient Appropriate Audit Evidence (SAAE) to confirm:

1. Opening balances do not contain misstatements that materially affect the current period's FS.

2. The accounting policies reflected in opening balances are consistently applied in the current period's FS — or, where changed, that the change is properly accounted for and disclosed as per the Applicable Financial Reporting Framework (AFRF).

## How to Obtain SAAE about Opening Balances

The auditor obtains evidence by:

1. Determining whether opening balances reflect application of appropriate accounting policies.

2. Determining whether prior period's closing balances are correctly brought forward to the current period, OR whether any adjustments are disclosed as prior period items in the current year's P/L.

3. Performing one or more of the following:

• If prior year FS were audited → read the audited FS (and the predecessor auditor's report).
• Evaluate whether audit procedures performed in the current period provide evidence relevant to opening balances.
• Perform specific audit procedures to obtain evidence regarding opening balances.

### Specific Procedures by Item Type

For Opening Inventory:

• Observe the current physical inventory count and reconcile it back to opening inventory quantity.
• Perform procedures on gross profit and cut-off.
• Perform procedures on valuation of opening inventory items.

For Non-Current Assets and Liabilities:

• Examine the accounting records underlying opening balances.
• Obtain confirmation from third parties.

## Factors Affecting Nature & Extent of Procedures

NTE of procedures to obtain SAAE on opening balances depends on:

• Whether prior period's FS were audited, and whether the predecessor auditor's opinion was modified.
• The significance of opening balances relative to current period's FS.
• The accounting policies followed by the entity.
• The nature of Classes of Account/Disclosures (CAD) and ROMM in current period's FS.

## When Prior Period FS Were Audited by a Predecessor

• The current auditor can obtain SAAE on opening balances by perusing copies of the audited FS of the prior period.
• The current auditor can rely on closing balances of the preceding period — except where during the current period the possibility of misstatement in opening balances is indicated.

## Communication with Management & TCWG

• If the auditor obtains evidence that opening balances contain misstatements → perform additional procedures to determine the effect on the current period's FS.
• If the auditor concludes such misstatements exist in current period's FS → communicate them to Management and TCWG.

## Reporting Implications

## Quick Memory Aid

Think "3 C's" for opening balances: Carry-forward (correctly brought forward), Consistency (of accounting policies), Correctness (no material misstatement).